Intra-Industry Trade and Patterns of Integration in Southeast Asia

Nội dung text: Intra-Industry Trade and Patterns of Integration in Southeast Asia

1. Intra-Industry Trade and Patterns of Integration in Southeast Asia Hervé B. BOISMERY University of Aix-Marseille and University of La Reunion (France) March 2016 Abstract: Southeast Asia experienced an unprecedented change in its international trade patterns in the last 25 years. Our paper tries to investigate this development using some significant interactive trade indicators. We attempt to study the progress in the trade integration process and the establishment of the Asian Economic Community (AEC), referring to some topics as essential as trade and export intensity and intra-industry trade indexes. We consider the situation of the priority integration sectors and particularly the electronics and related equipment. Our results establish that a rising share of vertical intra-industry trade is an important factor in explaining the recent expansion of intra-regional trade within Asia. In this regard, the evolution of Viet Nam's international trade has caught our attention. Keywords: Export and trade intensity; integration priority sectors; intra-industry trade; fragmentation; ASEAN countries’ integration - JEL Classification: F12, F14, F19, O52, 057 77
2. 1- Introduction For quite a long time after the Second World War, East Asian countries did not consider the need for a regional integration and an economic order. The emergence of the GAAT and the Bretton Woods systems caused this silence, helping to stabilize the world economy and to ensure a stable growth in the region. However, the end of the cold war and of the armed conflicts, then the increasing economic interdependency among countries in East Asia initiated some movements towards regionalism. As Katzenstein (2000) stated, 'while the old regionalism emphasized autarchy and direct rule, the new one relies on interdependence and indirect rule'. The financial crisis in 1997 was crucial, and sharply increased awareness on regional actions. In December 1997, the Association of Southeast Asian Nations (ASEAN) adopted a vision, till 2020, aimed at 'transforming ASEAN into a stable, prosperous, and highly competitive region with equitable economic development and reduced poverty and socio- economic disparities' with the aim of integrating the ASEAN countries economies. In accordance with the document ASEAN Vision 2020, to this end, there is to be a free flow of goods, services, investment and skilled labor, and free flow of capital in order to prompt economic growth and development and reduce socio-economic disparities within the region (Lloyd and Smith-2004). Twenty years later, the evidence suggests that the ASEAN Economic Community (AEC) implementation is intensifying, but sometimes with disappointing results and by certain aspects an appearance of dilution. Nevertheless, encouraging is the fact that several ASEAN and non-ASEAN multinational companies are already operating production networks based on the envisaged ASEAN single-market model, especially in some high-tech sectors. Our contribution attempts to study the progress in the trade integration process in Southeast Asia by reference to the merchandises and goods international trade, mainly in the framework of ASEAN PlusThree Community (ASEAN + 3), including ten countries members of ASEAN plus China, Japan and South Korea.Apart from the introduction, our paper consists of four sections. The first section studies the merchandise trade dynamism in Asia and within ASEAN by reference to the following topics and using interactive trade indicators: patterns of merchandise trade; growth of merchandise trade; evolution of intraregional trade; trade intensity and geographical concentration. The second section analyzes the process of trade integration based on the intra-industry trade, concept that has inspired considerable theoretical and empirical developments over the three last decades, taking in account several topics. The third section is dedicated to some aspects of the integration process within ASEAN countries, considering the priority sectors defined by the Vientiane Agreement of 2004. The fourth section examines the particular situation of electrical machinery and equipment sector, in order to identify and understand the international fragmentation and modularization of production processes in this strategic and essential industrial activity, as a major axis of the international activity. To simplify, we consider mainly the trade flows among the six major ASEAN members: Indonesia, Malaysia, Singapore, Philippines, Thailand and Vietnam. These six countries accounted for around 96% of total ASEAN GDP in 2013. In each of these sections, 78
3. we introduce permanent and detailed references to the situation of Viet Nam, a transition country whose growth and integration in the international trade have been decisive during the last two decades. 2- Merchandise Trade Dynamism in Asia and within ASEAN: Mixed Performances In this section, we attempt to provide a global perspective of trade dynamism in Asia and within ASEAN, studying the evolution of the merchandise trade patterns and of the main trends, completing our analysis by using some interactive trade indicators like export and trade intensity indexes or geographical concentration. 2.1 – Southeast Asian Countries and Growth of Merchandise Trade After having summarized the main trends of merchandise trade within Asia and from Asia, we try to highlight some of the salient features of this evolution, mainly the strong growth of exports from the Southeast Asian countries. In fact, after a trendy increase during the last decade, the share of ASEAN countries in world export represented 6.64 % in 2013. Witness of the trade dynamism, the Trade Balance has been in structural and regular excess during the last decade (more than US 99 US billion dollars in 2010 and almost 31 billion in 2013). Nevertheless, the decreasing during the three last years, as a consequence of a strong import dynamism, appears as a new reality requiring attention. Table1 - Exports and Imports of Merchandise (Millions of US dollars) Countries Indonesia Malaysia Philippines Singapore Thailand Vietnam 2000 52.31 % 71.34 % 80.07 % 67.56 % 68.01 % 67.75 % 2013 59.37 % 74.37 % 85.54 % 67.89 % 72.35 % 81.35 % Source – IMF Directions of Trade Statistics Tables 2 and 3 provide us now relevant data during the period 2006 – 2014: 1) The total trade of ASEAN countries increased by almost 80 % in only seven years, between 2005 and 2013, from 1402 to almost 2512 billion dollars. Nevertheless, during this period, we can observe disparate results across the countries, but it appears that, for most of the countries, the ASEAN + 3 trade has grown more significantly than the intra-ASEAN trade strictly speaking. 2) The Vietnamese situation is significant in this respect, with a rate of growth of 21.2 % for the Extra-ASEAN trade and of only 11.3 % for the Intra-ASEAN trade during the period, as a consequence of a strong diversification of export markets during the recent period. The decrease of bilateral trade within ASEAN in relative terms (i.e., as a percentage of Vietnam's total trade) results largely from the more rapid expansion of Vietnam's trade with the others such as the United States, the European Union, Korea, Japan and China, which reflects the sequencing of Vietnam's economic integration with the region and the world. 79
4. Table 2– ASEAN Countries : Total Trade in million US $ and Trade Share to ASEAN and ASEAN + 3 Countries (%) Countries 2000 2005 2010 2011 2012 2013 2014 Indonesia –Total 95,638.70 143,360.15 293,441.63 380,931.27 381,722.18 369,179.71 354,470.43 ASEAN 18.16 % 22.92 % 24.62 % 24.47 % 25.02 % 25.59 % 25.54 % ASEAN + 3 52.56 % 57.24 % 59.90 % 60.53 % 60.52 % 59.89 % 58.13 % Malaysia –Total 180,359.27 254,588.91 363,483.23 380,931.27 381,722.18 369,179.71 354,470.43 ASEAN 25.40 % 25.54 % 26.16 % 26.05 % 27.31 % 27.39 % 26.85 % ASEAN + 3 53.11 % 54.54 % 58.52 % 58.16 % 59.37 % 59.36 % 58.08 % Philippines –Total 72,707.09 88,635.98 111,624.59 114,200.90 119,877.66 121,991.95 132,772.23 ASEAN 15.61 % 18.07 % 25.48 % 21.27 % 21.12 % 19.19 % 19.71 % ASEAN + 3 44.00 % 53.36 % 59.88 % 57.34 % 58.38 % 57.58 % 60.18 % Singapore – Total 272,678.41 429,644.10 663,151.85 776,150.29 789,669.30 785,240.80 776,376.08 ASEAN 26.06 % 28.89 % 27.33 % 26.53 % 26.57 % 26.39 % 26.71 % ASEAN + 3 51.79 % 55.54 % 55.64 % 53.71 % 53.89 % 54.43 % 54.47 % Thailand – Total 130,886.14 228,305.74 378,487.43 449,358.31 478,343.76 474,517.86 453,443.12 ASEAN 18.08 % 20.08 % 19.83 % 20.18 % 20.23 % 21.07 % 22.03 % ASEAN + 3 48.22 % 52.94 % 54.05 % 53.64 % 54.75 % 53.83 % 54.54 % Vietnam – Total 30,119.27 69,208.20 153,184.93 197,393.26 222,434.88 255,653.07 287,597.03 ASEAN 23.47 % 21.77 % 17.47 % 17.45 % 17.12 % 15.57 % 14.63 % ASEAN + 3 59.44 % 55.57 % 56.15 % 56.97 % 58.31 % 57.81 % 56.88 % Table 3 – ASEAN Countries : Export Share to ASEAN and ASEAN + 3 (%) Countries 2000 2005 2010 2011 2012 2013 2014 Indonesia – ASEAN 17.52 % 18.47 % 21.14 % 20.69 % 22.01 % 22.26 % 22.59 % ASEAN + 3 54.63 % 57.34 % 56.98 % 58.16 % 58.57 % 57.21 % 53.32 % Malaysia – ASEAN 26.56 % 26.08 % 25.37 % 24.60 % 26.79 % 28.05 % 27.89 % ASEAN + 3 50.46 % 51.23 % 57.24 % 57.61 % 59.18 % 60.56 % 59.20 % Philippines - ASEAN 15.65 % 17.34 % 22.47 % 17.97 % 18.85 % 15.96 % 14.91 % ASEAN + 3 40.13 % 53.36 % 61.54 % 61.40 % 64.39 % 63.29 % 63.56 % Singapore - ASEAN 27.36 % 31.37 % 30.26 % 31.14 % 31.73 % 31.38 % 31.22 % - ASEAN + 3 50.71 % 58.36 % 61.10 % 60.84 % 53.89 % 62.71 % 62.93 % Thailand - ASEAN 19.34 % 21.09 % 22.93 % 24.28 % 24.66 % 25.95 % 26.11 % - ASEAN + 3 45.02 % 51.44 % 52.23 % 54.22 % 54.43 % 55.38 % 54.25 % 80
5. Vietnam - ASEAN 18.09 % 17.70 % 14.83 % 14.62 % 15.63 % 14.58 % 13.35 % - ASEAN + 3 51.09 % 44.16 % 42.89 % 45.66 % 46.98 % 44.31 % 42.68 % Source – IMF Directions of Trade Statistics 2.2 – Integration and Intensity of International Trade within ASEAN and Asian Countries Two indices are commonly used to measure the intensity of international trade and integration: the Export Intensity Index and the Trade Intensity Index. A-The Export Intensity Index is the ratio of a trading partner's share to a country / region's total exports and the share of world exports going to the same trading partner. It is calculated as: = 𝒙𝒙𝒊𝒊𝒊𝒊⁄𝑿𝑿𝒊𝒊𝒊𝒊 Where is the dollar value of 𝑿𝑿exports𝒊𝒊𝒊𝒊 𝒙𝒙𝒘𝒘𝒘𝒘 ⁄of𝑿𝑿𝒘𝒘𝒘𝒘 country / region i to country / region j ; is the dollar value of the exports of country / region to the world; is the dollar value 𝒙𝒙𝒊𝒊𝒊𝒊 of world exports to country / region j; and is the dollar value of world exports. An index 𝑿𝑿𝒊𝒊𝒊𝒊 𝒙𝒙𝒘𝒘𝒘𝒘 of more than one indicates that trade flow between countries / region is larger than expected 𝑿𝑿𝒘𝒘𝒘𝒘 given their importance in world trade. 81
6. B-The Trade Intensity Index is the ratio of a trading partner's share to a country / region's total trade and this share of world trade with the same trading partner. It is calculated as: = 𝒕𝒕𝒊𝒊𝒊𝒊⁄𝑻𝑻𝒊𝒊𝒊𝒊 where is the dollar value of total𝑻𝑻𝒊𝒊𝒊𝒊 trade𝒕𝒕𝒘𝒘𝒘𝒘⁄ 𝑻𝑻of𝒘𝒘𝒘𝒘 country / region i with country/ regionj; is the dollar value of the total trade of country / region iwith the world; is the dollar 𝒕𝒕𝒊𝒊𝒊𝒊 value of world trade with country /region j; and is the dollar value of world trade. An 𝑻𝑻𝒊𝒊𝒊𝒊 𝑡𝑡𝒘𝒘𝒘𝒘 index of more than one indicates that trade flow between countries / region is larger than 𝑻𝑻𝒘𝒘𝒘𝒘 expected given their importance in world trade. Table 4 -Export Intensity Index Countries 2001-2003 2011-2014 Countries 2001-2003 2011-2014 Indonesia : - ASEAN 3.04 3.20 Singapore : - ASEAN 5.74 4.52 - ASEAN + 3 2.78 2.17 - ASEAN +3 2.72 2.39 Malaysia : - ASEAN 4.81 4.03 Thailand : - ASEAN 3.89 3.69 - ASEAN + 3 2.56 2.28 - ASEAN + 3 2.40 2.09 Philippines : - ASEAN 2.38 2.41 Viet Nam : - ASEAN 3.14 2.10 - ASEAN + 3 2.11 2.48 - ASEAN + 3 2.62 1.71 Source: Author's calculation based on IMF - Directions of Trade Statistics Table 5 - Trade intensity Index Countries 2001-2003 2012-2014 Countries 2000-2003 2012-2014 Indonesia : - ASEAN 2.94 3.32 Singapore : - ASEAN 4.21 4.02 - ASEAN +3 2.54 2.47 - ASEAN + 3 2.33 1.98 Malaysia : - ASEAN 4.11 3.96 Thailand : - ASEAN 2.92 3.07 - ASEAN + 3 2.48 2.28 - ASEAN + 3 2.25 2.11 Philippines : - ASEAN 2.52 2.52 Viet Nam : - ASEAN 3.80 2.68 - ASEAN + 3 1.99 1.99 - ASEAN +3 2.83 2.31 Source: Author's calculation based on IMF Directions of Trade and Statistics As before, some salient facts appear significantly: 1) For all the countries, the trade intensity indexes with ASEAN and ASEAN + 3 are markedly higher than one, which reports a trade highly intense, consequence of the Trade Agreements. 82
7. 2) The most powerful economies (Singapore and Malaysia) have got very high intensity indexes (more than 4), which means that these countries are in leadership positions within ASEAN supported by highly intense trade relationships. 3) The Trade Index Intensity of Viet Nam with ASEAN is decreasing but remains high, reflecting a diversification of the trade opportunities. 4) Those results could also reflect a geographic proximity among Asian countries and, in some respects, the diversification opportunities and markets that a transition country like Viet Nam can achieve. 83
8. 2.3 - Geographical Concentration of Merchandise Trade The Hirschmann Index is a measure of the geographical concentration of exports, which reveals how much a region or country's exports are dispersed across different destinations. High concentration levels are interpreted across different destinations. High concentration levels are sometimes interpreted as an indication of vulnerability to economic changes in a small number of export markets. This index is defined as the square root of the sum across destinations of the squared export shares for the region under study to all destinations. It takes a value between 0 and 1. High values indicate that exports are concentrated on fewer markets. The formula is the following: 2 Regional Hirschman Index (RHI) = ∑𝒅𝒅 𝑿𝑿𝒔𝒔𝒔𝒔 Wheres is the set of source countries under study�∑, d𝑑𝑑 �is∑ 𝒔𝒔the𝒔𝒔 𝑿𝑿 𝒔𝒔set𝒔𝒔� of destinations,w is the set of countries in the world, andX is the bilateral flow of exports from the source to the destination. We want to sum over all destinations, so the setsd and wcontain the same elements. Table 6 - Hirschman Index: Geographical Concentration of Merchandise Trade Countries Indonesia Malaysia Philippines Singapore Thailand Vietnam 2001-2003 0.46 0.39 0.43 0.40 0.39 0.51 2012-2014 0.34 0.35 0.37 0.36 0.38 0.36 Source: Author’s calculation based on UN COMTRADE and WTO The Hirschman Index is subject to an aggregation bias. The more disaggregated the data from which it is calculated, the better. Nevertheless, in most of the countries, this index is stable or slightly declining. In Vietnam, the index remains high although significantly decreasing, suggesting that this country has diversified its export markets over the period considered. 3- Intra-Industry Trade and Patterns of Integration East Asia experienced an unprecedented change in its international trade patterns during the two past decades. Until the 1980's, East Asia developing countries exported resource-based and labor intensive products, while Japan and Korea exported a wide range of final manufactured goods. The traditional theory of comparative advantage works well to explain such trade patterns: differences in resource endowments, capital labor-endowment ratio, and technological capabilities among countries largely determine the pattern of production location and international trade. The current trade patterns of East Asia however can no longer be fully explained by the traditional comparative advantage theory. The last 15- 20 years witnessed the rapid development of cross-border production networking among East Asian countries that have been aggressively receiving foreign direct investment (FDI). In particular, trade in machinery parts and components drastically increased in both exports and imports, pushing up the share of machinery products. In this context, intra-industry trade has become much more important than before in East Asia and within ASEAN. 84
9. 3.1 - Inter-Industry Trade and Intra-Industry Trade In the absence of resistance to trade, such as ignorance of trading opportunities, distance, transport costs, and tariffs, countries trade because of differences in prices at home and abroad. These prices differences can reflect economies of scale, by which a country has a lower cost of production simply because its domestic market is larger than that of its trading partners. Price differences can also reflect differences in the opportunity costs of production and a country is said to have a comparative advantage in the production of a commodity if its opportunity costs are lower than of its trading partners. This difference in opportunity costs may reflect international differences in factor endowments. So a country with a high endowment of natural resources or labor relative to capital will be a low- cost producer and exporter of natural resource and capital- intensive goods, such as agro-based, wood-based, or rubber-based products, and a high-cost producer and importer of labor-intensive goods such as textiles. This phenomenon is called Inter-industry trade. However, similarities between countries can also generate opportunities for trade between them. This provides the second reason explaining the increasing trade between countries having similarly high levels of income and real wages. This leads them to have a similar industrial structure and anincome-led high demand for different varieties (models) of the same commodity (e.g. cars) in their consumption patterns. Nevertheless, economies of scale do not allow them to produce something of each variety. They specialize in producing different varieties, and this causes them to have a high level of trade in different varieties or models of the same commodity. That is a given country exports one variety or model and imports another variety or model of what is essentially the same commodity. This phenomenon is called intra-industry trade. As it will be discussed further, our study is using a conceptual framework, which distinguishes the following categories of international trade: traditional comparative advantage and one-way trade; horizontal production differentiation and horizontal IIT; vertical production, differentiation and vertical IIT; international fragmentation and vertical IIT. Table 4 provides a summary of the theoretical foundations for each type of trade in an empirical study. 1) Traditional comparative advantage and inter-industry trade or one-way trade Traditional trade theories explain inter-industry trade patterns based on comparative advantages in relative factor endowments or technology. In a standard setting of the Hecksher-Ohlin model or the Ricardian model with constant-returns-to-scale technology and perfect competition, a country exports capital (physical/human)-intensive or high-tech products when it is capital (physical/human)-abundant or technology-superior, and labor- intensive or low-tech products when it is labor-abundant or technology-inferior. Such inter- industry trade is classified as part of one-way trade. 2) Horizontal production differentiation and horizontal intra-industry trade The most convenient and popular theoretical basis of product differentiation is horizontal product differentiation, mainly consequence of a monopolistic competition derived from the existence of economies of scale in the differentiated product industry. In these 85
10. models, products are different because of certain attributes, but they are fundamentally the same in terms of quality, cost, and technology employed in their production. Horizontal IIT in our empirical analysis is basically the result of an intra-industry trade with horizontal product differentiation Table 4- Trade patterns: theory, empirical classifications, market structure and key factors. Inter-industry trade Horizontal IIT- Horizontal Vertical IIT -Vertical Vertical IIT (One-way trade) product differentiation product differentiation (International (for final products) (for final products) fragmentation) Differences in technology Monopolistic competition; Differences in factor International splitting of Differences in factor "Ideal variety" approach; endowments and income product process into two or endowments. demand for variety; distribution more production blocks Comparative advantage economies of scale in Differences of technology (PBs). theories production of every variety; in the homogeneous sector Differences in wages and diversity of tastes in terms The North with high-tech technologies at PBs level. of location. exports high quality Service link costs Similarity in factor products and the South connecting PBs, including endowment; similarity in exports low-quality transportation costs, per capita income; products. coordination cost, trade difference in market size barriers Source: H. Boismery (2008) 3) Vertical production differentiation and vertical IIT Some authors (cf. Flam and Helpman - 1987) propose models of North-South trade, with a vertical product differentiation, in which the North uses high technology to export high-quality products and the South uses low technology to export low-quality products. There exist differences between the two countries in technology to produce differentiated goods or in labor input per unit of output of the differentiated goods, and the North (South) has comparative advantage in high-quality (low-quality) products. On the demand side, similar to Falvey and Kierzkowski (1987), each individual demands aquality level of differentiated product consistent with the individual incomes. As a result, differences in technology and income distribution (with an overlap in income distribution) explain vertical IIT. 4) International fragmentation and vertical IIT Some authors (cf. Jones, Kierzkowski and Leonard-2002) argue that international fragmentation in vertical production chains, i.e. the splitting of an initial vertically integrated production process into two or more production blocks, and locating them beyond national borders, also results in intra-industry trade (and inter-industry trade). The physical dispersion of production processes requires costly service links to connect production blocks, including transportation, telecommunication, and various coordination tasks, which are often subject to economies of scale. Recent developments in the world trading system, as well as technological advances, have lowered service link costs and created new opportunities for extending production fragmentation across national frontiers 3.2 – Review of Related Literature Referring to the Asian Countries What sort of intra-industry trade do we currently observe in East Asia? The typical model of intra-industry trade that appears in textbooks is the horizontal intra-industry trade (horizontal IIT) model, which is usually accompanied by horizontal product differentiation 86
11. and well explains intra-industry trade among developed countries such as members of the European Union. Another popular theoretical model of intra-industry trade is the vertical product differentiation model in which high-income countries export high-price, high quality products, while low-income countries export low-price, low-quality products. Intra-industry trade in East Asia does not seem to be fully explained by these models, however. Rather, intra-industry trade resulting from international fragmentation, the importance of which is addressed by authors like Jones, Kierzkowski and Leonard (2002) , Ando (2007) or Wakasugi (2007), seems to be the key to understanding current trade patterns in East Asia. Intra-industry trade is attributed to several forces. A part of the IIT literature is concerned with the international division of the supply-chain in commodity production. Instead of producing the whole commodity in a single country, the relevant production line is segmented into several parts depending on skill, technology and factor requirements, and then countries engage in back and forth trade in intermediate inputs until the final production is assembled. Athukorala and Yamashita (2006) examine fragmentation trade in various regions of the world and find that this type of trade is rising faster than the trade in final goods and services. Southeast Asia region is far ahead of the other regions in the fragmentation trade. Low adjustment costs, regional preferences, and availability of required skills with competitive wage have fostered a vibrant intra-regional trade in parts and components in this region. This intra- regional trade expansion has been accompanied by extra-regional trade creation in final goods and services. This finding point toward a symbiotic relationship between regional and global trade liberalization. Increased trade in parts and components through regional trade liberalization requires market access opportunity in other regions in final goods through global trade liberalization. The case of relative importance of fragmentation in East Asia and Europe is clearly analyzed by Kimura et al. (2007). In their study, 60 traded items within the SITC commodity code 7, 82, 87, 88 and 89 are identified as parts and components trade for the machinery and transport sectors. The rest of the commodities within these classes are considered as traditional inter-industry in final goods. During the period 1987 to 2003, parts and components trade grew faster in the East Asia region (334%) compared to the EU region (194%). The rising amount is of intra-industry trade is attributed to location advantage (e.g. agglomeration effects) and reduced costs of the services link between production blocks across neighboring countries. In this context, Cortinhas (2007) examines the relationship between the intensity of intra-industry trade and synchronization of business cycles in the ASEAN region. Using all reported four-digit SITC trade data during the period 1962-1966, this study finds a positive correlation between intra- industry trade and business cycle synchronization. Similar findings are found in Song and Sohn (2012), but in a broader coverage including ASEAN and six other East Asian countries. Sawyer et al. (2010) examine the determinants of intra-industry trade in ten SITCsectors among 22 countries from Central, East, Southeast and South Asia for the year 2003. Intra- industry trades for these ten sectors are measured by a variant of the Grubel-Lloyd index. The study finds that the level of intra-industry trade is higher for countries that have higher incomes, larger share of manufacturing sectors, and economies that are more open. However, geographic distance and differences in economic sizes of the trading partners have negative effects on the level of intra-industry trade. 87
12. In a recent and significant contribution, using disaggregated data at six-digit harmonized code classification, Salim, Islam and Bloch (2015) examine the patterns and determinants of horizontal and vertical intra-industry trade in the automobile and electrical appliances sectors during the past few decades among the six major Southeast Asian countries. It appears that intra-industry trade is much higher than the inter-industry trade in each of these two sectors. There is a clear evidence of the importance of economies of scale. This finding is consistent with the large-scale production structure of heavy manufacturing industries where fixed-costs account for a significant amount of total cost. Overall, the results suggest that intra-industry trade is promoted among ASEAN members by the size of their GDPs and a similar level of their GDP capita. These findings suggest that economic integration among the ASEAN countries, combined with geographic proximity and similar economic size and level of development, has brought strong intra-industry trade across differentiated product varieties and along the supply chain within the manufacturing sectors studied. 3.3 -Aggregate Intra-Industry Trade in Asia A key element in determining the applicability of specialization scenario or endogeneity scenario is whether trade expansion is through inter-industry trade or through intra-industry trade. The aggregate intra-industry trade index provides us with an overall measure of the relative importance of intra-industry trade in an economy's trade profile. Table 5 compares the intra-industry trade index (IIT) between East Asia and the EU using the 3- digit level data of the Standard Trade International Classification (STIC). The index is measured as: = 1 - 𝒌𝒌 𝒌𝒌 ∑𝒊𝒊�𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝒊𝒊𝒊𝒊−+ 𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝒊𝒊𝒊𝒊� 𝑰𝑰𝑰𝑰𝑰𝑰𝒌𝒌 𝒌𝒌 𝒌𝒌 ∑𝒊𝒊�𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝒊𝒊𝒊𝒊 𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝒊𝒊𝒊𝒊� Where is total exports in industry k from country i to country j and is total imports𝒌𝒌 in industry k from country j to country i. As intra-industry trade 𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝒊𝒊𝒊𝒊 increases,𝒌𝒌 the index will monotonically increase from 0 to 1. 𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝒊𝒊𝒊𝒊 Table 5- Intra-Industry Trade in East Asia and the European Union (percentage) Countries 1990 2000 2005 2012 Countries 1990 2000 2005 2012 China-PR 26.3 36.3 34.9 32.5 Austria 41.3 42.8 43.7 46.5 Hong Kong 39.3 36.9 35.2 32.8 Denmark 37.9 42.9 43.5 44.9 Japan 21.1 35.4 34.4 33.7 Finland 30.5 28.1 29.4 31.8 Korea 28.2 41.6 39.9 36.9 France 46.3 47.1 48.0 48.9 Germany 50.7 51.2 51.0 49.9 Brunei - - 6.3 7.9 Greece 17.3 19.0 21.8 24.6 Cambodia - - 5.4 12.2 Ireland 27.7 28.4 29.3 26.6 Indonesia 20.6 26.5 27.5 30.9 Italy 36.3 40.6 43.3 40.9 Malaysia 28.4 47.5 44.6 41.2 Netherlands 41.0 43.8 43.2 43.2 Philippines 28.1 42.2 40.1 37.8 Portugal 22.2 32.0 31.9 32.1 Singapore 34.9 44.9 45.1 45.6 Sweden 41.6 44.7 44.1 43.0 Thailand 27.8 41.4 45.0 41.4 UK 49.3 52.0 51.8 47.8 Vietnam - - 29.3 35.7 Average ASEAN + 3 28.3 39.8 37.6 38.8 Average EU 36.9 39.4 40.8 40.0 Average- ASEAN - - 25.29 31.5 Source: Author's calculations based on data from Comtrade. 88
13. The results in the table 5 show that, until the beginning of the 1990's, intra-industry trade in Asia was not as high as that in the EU. The intra-industry trade index for East Asia was on average 28.3 % in 1990, which was far lower than the 36.9 % for the EU in the same year. However, the index has been increasing so fast in Asia that it appears to be catching up the European level at the end of the last decade. If this trend were to continue in East Asia and in ASEAN, the endogeneity in the process of integration would prevail with the deepening of the regional interdependence. 4- Intra-Industry Trade within ASEAN at the Priority Sectors Level The Framework Agreement for the Integration of Priority Sectors was signed in Vientiane in November 2004. This Agreement outlined the steps to be taken to accelerate the integration of nine major sectors in the ASEAN economies: agro-based products, automotive products, e-ASEAN (ICT), electronics, fisheries, healthcare products, textiles and clothing, wood-based products, rubber-based products. We try now to estimate the IIT for these priority sectors identified by ASEAN, referring to six countries accounted for around of 96% of the total ASEAN GDP in 2012: Indonesia, Malaysia, Singapore, Philippines, Thailand and Vietnam. 4.1 -Measuring Intra-Industry Trade The calculated index is used to measure intra-industry trade. However, it is also sometimes used as a measure of deepening integration since it reflects an increase in the division of labor, combined with a reduction in transaction costs (Bora-1996; Austria-2003). Several studies have already been done to measure the degree of intra-industry trade in different countries and regions in the world. We can note among the most relevant: Bane (2002), OECD (2002), Austria (2002 and 2003), Bora (1996), Kennel (1997), Havrylyshyn and Kunzel (1997). The most commonly index used is the Grubel-Lloyd Index, which is given by the following formula (Grimwade-2000): ( + ) | | 100 IIT = ( + ) x ∑ 𝑿𝑿𝒊𝒊 𝑴𝑴𝒊𝒊 − ∑ 𝑿𝑿𝒊𝒊 − 𝑴𝑴𝒊𝒊 ∑ 𝑿𝑿𝒊𝒊 𝑴𝑴𝒊𝒊 Where: 1) = total exports of product or industry i. -2) = total imports of product or industry i. 𝑿𝑿𝒊𝒊 𝑴𝑴𝒊𝒊 89
14. The straight brackets around the expression | | denotes that the sign of the trade balance is ignored. The index measures intra-industry trade as the percentage of a 𝑿𝑿𝒊𝒊 − 𝑴𝑴𝒊𝒊 country's total trade (X + M) that was matched or balanced (X = M). The index has a value between 0 and 100. If all trade was balanced, the index will be 100. If all trade was one-way, the index will be 0. Hence, the closer the value of the index to 100, the greater the importance of intra-industry trade. However, the Gruebel-Lloyd Index is criticized for measuring intra- industry trade as a proportion of a country's total trade with all other countries, i.e. multilateral trade. It is argued that since the existence of multilateral intra-industry trade is expected, a more appropriate measure is the bilateral intra-industry trade index. Thus, this study will use the Gruebel-Lloyd Index modified as follows: + = X 100 𝒌𝒌 𝒌𝒌 + 𝒌𝒌 𝒌𝒌 𝒌𝒌 ∑�𝑿𝑿𝒊𝒊𝒊𝒊 𝑴𝑴𝒊𝒊𝒊𝒊 � − ∑�𝑿𝑿𝒊𝒊𝒊𝒊 − 𝑴𝑴𝒊𝒊𝒊𝒊� 𝑰𝑰𝑰𝑰𝑰𝑰𝒊𝒊𝒊𝒊 𝒌𝒌 𝒌𝒌 ∑�𝑿𝑿𝒊𝒊𝒊𝒊 𝑴𝑴𝒊𝒊𝒊𝒊� Where: 1) Subscript i refers to reporting country -2) Subscript j refers to partner country -3) Subscript krepresents product. -4) ∑ refers to the sum of products / commodities at the 4-digit HS code. The index will be estimated in relation to each bilateral trade flow between pairs of ASEAN economies, and between each member and the rest of the ASEAN as a group. The resulting IIT index will be used as an indicator of the integration going in the sectors. The study will cover the prioritygoods sectors, at the 4-digit HS (Harmonized System) Code. HS has three levels of aggregation namely, 2-digits, 4-digits and 6-digits. The 2-digit level represents a too high level of aggregation such that intra-industry trade could be overestimated. On the other hand, the 6-digit level may represent too low a level of aggregation such that intra-industry trade could be underestimated. Thus, the 4-digit level could be taken as a good measure of an industry. In this framework, the PC-TAS (Trade Analysis System on Personal Computer) database of the UNCTAD, which is available in CD- ROM, will be used for the study. .4.2 - Degree of Integration by Country and by Sector In the Table 6, referring to 2013, the priority products are classified according to their degree of integration based on the IIT index classification. Those results show for each sector the intra-industry trade between each member economy and the rest of the region as a group, highlighting the trade with bilateral partners that are driving the integration in the sector. 90
15. Table 6- Degree of Integration by Country and by sector- 2013 Countries Weak Mild Moderately Strong Strong 24.99 . 49.99 . 74.99 . 99.99 . Indonesia Agro-≥based𝑰𝑰𝑰𝑰𝑰𝑰 ≥(17.35)𝟎𝟎 𝟎𝟎𝟎𝟎 Fisheries≥ 𝑰𝑰𝑰𝑰 (26.27)𝑰𝑰 ≥ 𝟐𝟐𝟐𝟐 𝟎𝟎𝟎𝟎 Automotive≥ 𝑰𝑰𝑰𝑰𝑰𝑰 ≥(51.18)𝟓𝟓𝟓𝟓 𝟎𝟎𝟎𝟎 ≥ 𝑰𝑰𝑰𝑰𝑰𝑰 ≥ 𝟕𝟕𝟕𝟕 𝟎𝟎𝟎𝟎 Textiles- Garments Healthcare (28.79) Electronics (50.09) (19.42) ICT (37.67) Rubber-based (53.06) Wood-based (25.58) Malaysia Agro-based (31.11) Automotive (56.34) Electronics (87.38) Fisheries (42.37) Healthcare (71.34) ICT (76.37) Rubber-based ( 49.56) Textiles- Garments (35.97) Wood-based (47.27) Philippines Agro-based (16.78) Automotive (25.34) Electronics (56.82) Textiles and Garments Fisheries (28.37) ICT (57.34) (16.34) Healthcare (25.61) Rubber-based (32.27) Wood-based (25.67) Singapore Wood-based (23.51) Agro-based (28.03) Rubber-based (60.36) Electronics (76.82) Automotive (44.62) ICT (78.51) Fisheries (28.21) Healthcare (43.62) Textiles – Garments (32.57) Thailand Agro-based (22.89) Textiles-Garments (29.87) Automotive (66.90) Electronics (78.75) Fisheries Rubber-based (53.45) ICT (76.18) Healthcare Vietnam Agro-based (12.98) Fisheries (13.43) Electronics (65.66) ICT (75.74) Automotive (23.76) Rubber-based (29.37) Healthcare (22.23) Wood-based (25.97) Textiles-garments (17.89) Source – Computed using PC/TAS Database. Indonesia- The Indonesian economy is mildly integrated with ASEAN as a result of significant levels of IIT in the automotive and rubber-based sectors. Indonesia needs to import many components for its car industry. There are increasing levels inthe ICT, electronics and wood-based sectors. There is a low IIT in the agro-based sector, which is the dominant employer of labor. This is to be expected, since there low intrinsic variety in this sector Malaysia- Excluding Singapore, Malaysia has the highest IIT for seven of the nine priority sectors, with "moderately" or "strong" data in automotive, healthcare, ICT, electronics and rubber-based. Those data reveal a deep participation in the ASEAN integration process, especially in Electronics and Information and Communication Technology. Philippines- The Philippines is mildly integrated with ASEAN. The electronics and ICT sectors exhibit moderately strong integration, followed by rubber-based, and fisheries. We must mention the export activity in electronic integrated circuits and accessories of motor vehicles. Singapore- Singapore is a special case because so much of its trade comprises re- exports. Excluding this activity, the IIT index is strong in electronics and ICT, as a consequence of important exports in the following activity: electronic integrated circuits (HS- 8542); parts and accessories for use with machines of heading 84.69 to 84.72 (HS-8473); automatic data processing machines and units thereof (HS-8471); diodes , transistors and similar semiconductor devices (HS-8541); electrical apparatus for line telephony or line telegraphy (HS-8517). 91
16. Thailand- In Thailand, we can see high indexes in rubber-based, automotive, electronics and ICT. Indeed, among the main exports of the country, we can observe: automatic data processing machines (HS-8461); electronic integrated circuits (HS-8542); motor cars and other motor vehicles (HS-8703); parts and accessories of the motor vehicles of headings (HS-8708; 87.01 to 87.05); air conditioning machines (HS-8415); natural rubber (4001) Among the main imports, we can observe: electronic integrated circuits (8452); parts and accessories for use with machines of heading 84.69 to 84.72 (HS-8473); automatic data processing machines and units thereof (HS-8471); electrical apparatus for line telephony or line telegraphy (HS-8517) The agro-based sector has a low value corresponding to a weak IIT because Thailand is a major exporter, but no importer, of rice. Vietnam- Vietnam has reached a mild level of integration to the intra-ASEAN trade. This country is now exporting manufactured articles included in sections HS-84/85 (electrical apparatus for line telephony or line telegraphy); 8443 (printing machinery). From 2009 to 2013, top exported products included petroleum oils and oils obtained from bituminous minerals (HS-2709), rice (HS-1006) and electrical apparatus for line telephony or line telegraphy (HS-8517). However, top import commodities included also HS-8517. For that, ICT gets a high level of IIT. In this context, Vietnam is strongly improving its integration 5 -Intra-Industry in Vietnam: the Case of Electrical Machinery and Equipment HS-85 In Asia, drastic changes have occurred in machinery industries, including general machinery (HS84), electric machinery (HS85), transport equipment (HS86-89), and precision machinery (HS-90-92). Within ASEAN, the share of machinery trade rose significantly in the 1990s and 2000s. In addition, both exports and imports of machinery parts and components increased more rapidly, suggesting a pattern that would be typical of back-and-forth transactions in vertical production networks within the region. Convergence of the commodity composition of exports and imports, as well as increases in machinery parts and components trade, underscore the growing importance of intra-industry trade in East Asia. The Vietnamese case looks significant of this trend. To highlight key features of Viet Nam's trade, we examine the behavior of Electrical Machinery and Equipment (HS-85) in exports and imports of Vietnam, in comparison with other ASEAN countries. The last decade witnessed a rapid expansion of machinery, electrical and equipment trade in many countries in the world and especially in Viet Nam. This suggests that trade at the intra-product level, rather than at the final good or industry level, became more active. After analyzing the trade dynamism and the main export commodities in Viet Nam, we study the particular situation of the vertical intra-industry trade and international fragmentation of HS-85 Electricalmachinery and equipment in this country. 5.1 - Trade Dynamism and Main Export Commodities in Viet Nam As we can see in the table 7, in 2013, top exported products by Viet Nam included HS 84-85 Machinery and Electrical Equipment (30.69%), HS 50-63 Textiles and Clothing (16.31%); HS 06-15Vegetable products, (7.92%), HS-27 Fuels 7.34 %), and 64-67 Footwear (6.81%). Those commodities represented almost 70% of the Vietnamese total export, with a value of 91.2 billion dollars in 2013. 92
17. Table 7– Vietnam: World Total Exports (Percentages and US Dollars Million) HS Two-Digits Commodities 2000 2005 2010 2012 2013 Top-Five Export Commodities 06-15 Vegetable products 13.59% 10.39% 11.09% 10.72% 7.92% 27 Fuels 26.41% 25.76% 11.45% 9.91% 7.34% 50-63 Textiles and Clothing 14.47% 16.36% 18.42% 15.85% 16.31% 64-67 Footwear 10.41% 9.81% 7.48% 6.76% 6.81% 84-85 Machinery and Electrical Equipment 7.95% 8.43% 14.15% 24.69% 30.69% Total 72.83 % 70.75 % 62.59 % 67.93 % 69.07 % Others 27.17 % 29.25 37.41 32.07 % 30.93 TOTAL 100.00 % 100.00 % 100.00 % 100.00 % 100.00 % EXPORT TOTAL US $ Million 14,483 32,447 72,237 114,259 132,033 Source – ASEAN and GSO 5.2 - Sectoral Intra-Industry Trade in HS-85 and HS-8517 Then, it looks useful to analyze the intra-industry trade concerning the commodities included in HS-85 Electrical Machinery and Equipment, and more specifically included in HS-8517 Electrical apparatus for line telephony or line telegraphy. For this purpose, we can use the following mathematical definition: ITT = 1 - X 100 | + | �∑𝒅𝒅 𝒙𝒙𝒊𝒊𝒊𝒊𝒊𝒊 − ∑𝒅𝒅 𝒎𝒎𝒊𝒊𝒊𝒊𝒊𝒊� ∑𝒅𝒅 𝒙𝒙𝒊𝒊𝒊𝒊𝒊𝒊 ∑𝒅𝒅 𝒎𝒎𝒊𝒊𝒊𝒊𝒊𝒊 Where s is the country of interest, d is the set of all other countries in the world, i is the sector of interest, x is the commodity export flow, and m the commodity import flow. In the ratio, the numerator is the absolute value of the difference between total exports and total imports in sector i. The denominator is the sum of the total exports and imports in sector i. Of course, the index is subject to aggregation bias (toward unity), both in terms of sectors and regions. It is not appropriate for measuring changes in intra-industry trade. For that, the marginal IIT index has been finally used. In the following table 8, we present the results of our estimations corresponding to the intra-industry trade of HS-85Electrical machinery equipment and parts and HS-8517 Electrical apparatus for line telephony or line telegraphy of Vietnam with the world. Table 8 - Viet Nam : Sectoral Intra-Industry Trade Index – Trade with ASEAN + 3 Commodity 2000 2003 2005 2007 2009 2010 2011 2012 2013 HS-85 65.23 73.27 79.95 80.11 83.45 84.31 85.27 86.23 89.36 HS-8517 - - - 72.37 86.37 85.31 93.41 93.01 94.45 HS-85:Electrical machinery, equipment and parts, telecommunications HS-8517 : Electrical apparatus for line telephony or line telegraphy equipment, sounds recorders; television recorders Source: Author’s calculation based on UN Comtrade We can observe almost complete overlap in HS-8517 Electrical apparatus for line telephony or line telegraphy, as consequence of international relocations in parts and components productions. Moreover, the marginal ITT is strongly and trendy increasing. 93
18. 5.4 - Fragmentation and Vertical Intra-Industry Trade: the Case of Electrical Equipment The modularization of production processes and international fragmentation of production are mentioned as causes for the drastic increase in international trade in recent years. FDI, which has become brisk in recent years, is a cause for the increase in such fragmentation. Empirical studies indicate that the increase in Japanese trade closely relates to the increase in overseas production based on direct investment from Japan (Ishido et al.- 2003). It is not necessary, however, that fragmentation is caused only by FDI. Some studies also show that the fragmentation within the East Asia region in recent years has been accelerated by various cost-reducing factors. Such cost reductions will be achieved through technological innovation, liberalization of trade and capital transaction, and harmonization of institutional factors, as well a rise of production efficiency due to the industrial development in East Asian countries. The increase of fragmentation of production is a cause for expanding trade volume by the international transactions of parts and intermediate goods. For this reason, Jones et al. (2002) argue that international fragmentation in vertical production chains, i.e. the splitting of an initial vertically integrated production process into two or more production blocks and locating them beyond national borders, results in a strong intra-industry trade. In this context, there is an increase in trade volume when the specialization of production realizes economy of scale. In most cases, modularized production processes achieve economies of scale. Parts and intermediate goods produced in the most efficient region are supplied to a greater number of users in the world market. Moreover, recent development in the world trading system, as well technological advances, have lowered service link costs and created new opportunities for extending production fragmentation across national frontiers and especially within ASEAN, as a consequence of lowering trade and regulatory barriers. In this context, Intra-industry trade is calculated from the four-digit HS code. The four-digit HS code is calculated from the six HS Code from products included in the HS-85 Commodity Classification of International Trade Statistics: Electrical Machinery, Equipment and parts, Telecommunications Equipment, Sounds Recorders, Television Recorders. Following Ando (2006), we consider trade in commodity k between country i and j is the inter-industry type if condition (1) is satisfied: , 0.01 (1) , 𝑀𝑀𝑀𝑀𝑀𝑀 �𝑋𝑋𝑖𝑖𝑖𝑖𝑖𝑖 𝑀𝑀𝑖𝑖𝑖𝑖𝑖𝑖 � 𝑀𝑀𝑀𝑀𝑀𝑀 �𝑋𝑋𝑖𝑖Where𝑖𝑖𝑖𝑖 𝑀𝑀𝑖𝑖𝑖𝑖𝑖𝑖 � ≤ is the export of commodity k from country i to country j, and is the import of commodity k into country i from country j. Commodities that do not fulfill the 𝑋𝑋𝑖𝑖𝑖𝑖𝑖𝑖 𝑀𝑀𝑖𝑖𝑖𝑖𝑖𝑖 above criterion fall into one of the two intra-industry trade categories. Trades are considered HIIT if unit value of exports and imports fall within the rage given by Equation (2). 1 (1 + )(2) (1+ ) 𝑋𝑋 𝑃𝑃𝑖𝑖𝑖𝑖𝑖𝑖 𝑀𝑀 𝛼𝛼 ≤ 𝑃𝑃𝑖𝑖𝑖𝑖𝑖𝑖 ≤ 𝛼𝛼 94
19. Where and are unit values of commodity k charged on exports from country i to country j, and𝑋𝑋 imports𝑀𝑀 into the country I from partner j respectively. Here is assumed at 𝑃𝑃𝑖𝑖𝑖𝑖𝑖𝑖 𝑃𝑃𝑖𝑖𝑖𝑖𝑖𝑖 0.25. Trade in commodities that fall outside the range indicated in both equations (1) and (2) 𝛼𝛼 is classified in the VIIIT category. As we can observe it, our major findings can be summarized as follows : 1) The significance of vertical IIT in HS-85 Electrical machinery and equipment increased sharply in Viet Nam and in most of the ASEAN countries, but horizontal IIT in HS85 Sector is significantly decreasing. - 2) Vertical transactions of parts and components across borders raise significantly during the last decade.- 3) The drastic increase in vertical IIT is largely due to the expansion of back-and-forth transactions in vertically fragmented production processes, rather than trade of quality-differentiated commodities. Table 9 - Intra-Industry Trade within Asian Countries (ASEAN + 3) - Vertical and Horizontal Intra-Industry Trade Index in HS-85 Sector - Electrical Machinery and Equipment and parts. Countries Indonesia Malaysia Philippines Singapore Thailand Vietnam 2000-2002 VIIT 28.23 67.23 40.82 62.68 64.36 15.24 HIIT 11.15 20.04 22.75 18.43 15.67 18.35 2011-2013 VIIT 51.39 65.23 43.97 69.27 60.25 57.38 HIIT 11.03 19.77 21.82 20.24 14.09 17.95 Source – Author’s calculations from UN Comtrade. Table 10 – Vietnam: Shares of parts and components in total trade (exports + imports) of HS85 Sector - Electrical Machinery and Equipment and parts; Telecommunications Equipment; Sounds Recorders; Television Recorders Countries Indonesia Malaysia Philippines Singapore Thailand Vietnam 2000 52.31 % 71.34 % 80.07 % 67.56 % 68.01 % 67.75 % 2013 59.37 % 74.37 % 85.54 % 67.89 % 72.35 % 81.35 % Source – Author’s calculations from UN Comtrade. All these findings confirm that that vertical international sharing in HS-85 Electrical machinery has become an essential part of each economy within ASEAN in the 2000s. Those results are in accordance with many theoretical analyses and empirical studies that found that the international fragmentation of the international location of production plants causes the expansion of intra-industry trade in emerging countries, and in turn causes international trade to grow at a higher pace than the increase in income levels. Many previous studies (Athukorala-2006; Ng and Yeats-2001; Yeats-2001; Ando-2006; Wakasugi-2007) provide statistical evidence to show that the expansion of trade in East Asia has been accompanied by a rise in vertical IIT. Some studies demonstrate that the vertical IIT of East Asian countries is closely related to foreign investment. Others studies, based on Japanese firm-level data, present that even apart from foreign investment, a broad production-distribution network within East Asia is a major cause for the expansion of vertical IIT (Ishido et al.-2003, 2005; Kimura and Ando-2003). 95
20. 6 - Conclusion In the light of our results, the following facts and trends can be clearly identified referring to the Asian integration process. 1) During the long period and the last two decades, ASEAN Countries has realized a growth of trade higher than the world average, as consequence of a strong economic development. In this context, the intra-industry trade in Asia has been increasing so fast in ASEAN that it has recently climbed almost as high as that in the European Union. If this trend were to continue in East Asia and especially within ASEAN, the endogeneity process of integration would prevail. 2) Drastic changes have occurred in machinery industries and especially in Electric and Machinery (HS85). In addition, both exports and imports of machinery parts and components increased rapidly, suggesting a pattern that would be typical of back-and-forth transactions in vertical production networks within the region. Convergence of the commodity composition of exports and imports, as well as increases in machinery parts and components trade, underscore the growing importance of intra-industry trade in Asia. 3) In the Vietnamese case, given the significance of HS85 Electrical machinery and equipment, our empirical analysis at a disaggregated level confirms that vertical international production sharing did become an essential part, particularly with the explosive increase in vertical intra-industry trade. In Viet Nam, like in all the ASEAN countries, the drastic increase in vertical intra-industry trade was largely due to the expansion of back-and-forth transactions in vertically fragmented production processes, rather than trade of quality- differentiated commodities. The international fragmentation of production means that the production process up to final goods is decomposed into a number of production processes having different factor intensities and leaded by several location advantages selected by the international investors. We know that the disparity of wage rate and per-capita income in East Asian countries, and especially within ASEAN, is larger than in Northern America Free Trade Association or between the European Union countries and, in this sense, the heterogeneity in factor abundance among East Asian countries holds a necessary condition that induces an increase in vertical Intra-industry trade. These changes in the pattern of production location and international trade occurred with the help of the region's promotion of foreign direct investment. Such elements have shaped the evolving pattern of fragmentation of production and trade and the vertical division of labor in Asia. 96
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